Plunge in 30-Year Treasury Bonds Spells the End of America’s Golden Age, to Some

On Friday, the yield on a 30-year Treasury bond briefly dropped below 2% for the second time in history. The first was on Thursday.

No big damage was evident, but some were reminded of an icy economic wind: the decades-long downward trend of 30-year bond yields. The 2% mark aside, the trend may be a sign of the end of the American Dream, predicated on the idea that ongoing growth will create social mobility and let your children do better than you.

Come on now. Really?

“Yes,” said Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management. “We can talk about things that are technically influencing it, but the trend line is an extraordinarily sad and depressing state of affairs.”

Since 1990, the yield of the 30-year bond—except for a 4-year period when the Treasury took it off the market—has seen a straight-line descent from a high of more than 9% to current rates around 2%.

The trend is a picture that some major money advisors have been trying to explain to their clients for years now. A combination of factors seems to herald a point where overall long-range growth is virtually nonexistent.

How bonds get priced

The U.S. Treasury Department doesn’t dictate yields. Instead, it makes bonds of a given denomination and maturity term available at auction. Bids set the final price, with “par” being the face value, and the yield. A classic example of supply-and-demand determined pricing, the more buyers, the more competition there is for the bonds. The more competition, the more people have to pay to get the bond and the less the Treasury needs offer in yield.

“We would think the steady state for the 30-year bond would equal the natural interest rate plus inflation expectations plus the liquidity and risk premium,” said Rich Higgins, an assistant professor of economics at Colgate University.

The natural interest rate is the one an economy organically exhibits from the combination of population increase, availability of natural resources, and productivity and efficiency improvements that technology bring.

To the natural interest rate, add inflation—an overall additional change in how an economy grows that can occur from many factors—and the liquidity and risk premium that people want for leaving money tied up for 30 years.

The definition explains why a sub-2% 30-year bond yield is worrying. The Federal Reserve targets the maintenance of a 2% long-term inflation rate. Subtract that from the yield and you’re losing money in real terms.

Why yields have been dropping

The easiest classical economics explanations for falling yields tend to focus on the years since the Great Recession. A global chase for money and returns has seen the U.S. as a safe haven in a world teeming with negative interest rates. The more institutions and people vying for a set number of bonds, the higher the price and the lower the yield.

“When you look at the flow data, all of the money is going into bonds and very little is going into equities,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. During this year alone “there’s been a huge trend of investors selling equities and buying bonds,” she said.

Additionally, inflation has stayed at bay. “We haven’t seen any upward pressure on wage growth at all,” Roland said.

The economy, by an important measure, has been slowing, further reducing inflation pressure. The Conference Board’s Leading Economic Index, which declined 0.3% in June after no change in May and a 0.1% increase in April. “The latest tick for last month showed a year-over-year increase of 1.5%,” Roland said. “That compares to 7% in the fall.”

Adding psychology

But that still doesn’t explain the longer view. What does is the human psychology of expectations. “You can look at long-run productivity gains, long-run growth, and have an idea of what they’ll be,” said Rebecca Neumann, professor and director of undergraduate studies in economics at the University of Wisconsin—Milwaukee. “Then the expectations play in.”

There is even a theory in economics that “expectations of inflation drive interest rates,” Neumann said. Many people in the current economy don’t remember times of double-digit inflation and interest rates. Increasingly, they expect low inflation because that is what they’ve always seen, creating price increases and lower expectations of salary growth that helps cap inflation. The last time inflation was over 10% was in 1981. People under 39 weren’t even alive then, let alone aware of how it can go.

Changing demographics play in ways other than memory. “About 20 years ago we put out research we called the race to zero based on long-term demographic trends,” said Michael Collins, a senior portfolio manager for fixed income at global investment management company PGIM. “Interest rates are really correlated to growth, which is correlated to the growth of the labor market.”

But labor markets have been shrinking in Japan for 20 years and in Europe for 10. Now they’ve begun to in China and the U.S. Prices tend to drop as average age increases, according to Collins, which is anti-inflationary.

The message isn’t one that many take kindly to. “People look at us like we’re crazy,” Collins said.

The ultimate result of low interest rates has what Shalett sees as a potentially inescapable implication.

“Economists can talk about money flow and people are buying the 30 year to hedge against stocks or they’re running away and escaping negative yields in other countries,” Shalett said. “But the reality is that someone buying a 30-year bond today that a 2% dividend—which is supposed to include some growth, inflation, and some risk—is willing to accept a 2% yield as a good investment. That means they aren’t all that excited that there are a lot of good investments out there that are going to return 4%, 5%, 10%, 20%. When you have bond prices that low and staying there, that’s a sad state of affairs.”

It may be the end of growth as we’ve come to expect it. But don’t call this the new normal. We’re living through the new abnormal.

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Tiny Luxembourg Is Having a Big Brexit Moment

If you haven’t found time to revisit Luxembourg—a tiny European state governed by a Grand Duke—in fifteen years, you may not recognize it now.

For decades, the country’s capital, called Luxembourg City, was a sleepy medieval city whose tranquil streets were home to a secretive finance industry.

But now its roads regularly resemble a jammed metropolitan highway—signs of a finance industry resurgence that has become far more visible.

“My dad’s generation is particularly bitter about this,” says Nathalie Weiss, a marketing manager at Vodafone, who grew up in the country. Her father is frustrated with the overcrowding on the roads, but she’s delighted with the renaissance, she admits. And in any case—she doesn’t expect an imminent slowdown.

“Especially with developments like Brexit, that doesn’t look like it’s going to happen any time soon,” she says.

As Britain prepares to leave the EU, companies are jostling to ensure that business is not disrupted. Many are choosing Luxembourg as a base within the bloc, putting the country on track to be a relocation runner-up, alongside places like Ireland, France and Germany, which all have vastly larger populations.

Old town of Luxembourg at night
The fortress and the old city center of Luxembourg are on the list of UNESCO World Heritage sites. (Nicolas Economou/NurPhoto via Getty Images)

Nicolas Economou—NurPhoto via Getty Images

The country offers companies a lucrative ecosystem. But the companies offer Luxembourg something, too—a chance to be a fully-fledged financial capital, just years after unflattering revelations about its tax system, known as the “LuxLeaks” scandal, drew a furious global backlash.

Birth of a finance hub

The Grand Duchy of Luxembourg, as it is officially called, is a small constitutional monarchy sandwiched between Germany, France and Belgium, with a Grand Duke instead of a king.

Home to about 600,000 people in an area slightly smaller than Rhode Island, it is best known for its imposing medieval castles, multilingual citizens (they speak French, German and Luxembourgish), and historically secretive finance industry.

Until the 1960s, steel production dominated the country’s economy. But when the EU introduced rules in the 1980s making it easier for asset managers to sell mutual funds to retail investors, the government embraced the changes more quickly than larger financial hubs did, sowing the seeds for the growth of a globally influential finance hub.

Notre-Dame Cathedral In Luxembourg
Notre-Dame Cathedral in Luxembourg. (Nicolas Economou/NurPhoto via Getty Images)

Nicolas Economou—NurPhoto via Getty Images

That embrace, however, coupled with an infamous system of tax loopholes, led to a reputation of a tax haven for multinationals and the super-rich. In 2014, the “LuxLeaks” revelations identified hundreds of companies, many of them household names like Amazon and FedEx, as receiving massive tax breaks.

Amazon in a statement at the time said that it had “received no special tax treatment from Luxembourg” and that it is “subject to the same tax laws as other companies operating [there].”

A FedEx spokesman at the time said the logistics company serves hundreds of countries and territories and is often required to establish legal entities in many of them, and had not used its entity in Luxembourg to reduce its tax base.

Following the backlash, the country adopted strict new rules on banking secrecy, and the finance industry has tried to reinvent itself as a thriving, transparent center for capital markets in a post-Brexit world. It’s starting to reap the benefits: today some of the world’s best-known tech companies, including eBay, Skype, and Paypal, have their European headquarters in Luxembourg and others are relocating to the country almost every month.

All the while, Luxembourg has remained a major asset management hub: the country is the second-largest market outside of the U.S., with an estimated 4 trillion euros ($4.5 trillion) worth of assets domiciled in the country.

A continental runner-up

The U.K.’s 2016 vote to exit the European Union later this year could mean that British financial firms lose their “passporting rights” that allow companies in EU member states to service clients across the bloc.

Luxembourg Grand Ducal Family Celebrates National Day 2019
Grand Duke Henri of Luxembourg, center, rules Luxembourg in place of a king. (Photo by Patrick van Katwijk/Getty Images)

Patrick van Katwijk—Getty Images

Many banks have already chosen hubs like Dublin, Frankfurt, Paris, and Amsterdam to secure a foothold in the EU post-Brexit, but Luxembourg’s capital is outstripping rivals many times its size.

According to an analysis published earlier this year by think tank New Financial, 275 firms in the U.K. have already moved or are moving some of their business, staff, assets, or legal entities from the U.K. to the EU in preparation for Brexit. Around 250 of those companies chose specific “post-Brexit hubs” for their EU business.

While Dublin ranked No. 1 with around 100 relocations, Luxembourg scored a solid second with some 60 relocations—nearly a quarter of the Brexit-related moves.

The Brexit shift has mainly bolstered two traditional areas of the finance industry: asset management and insurance, where the Duchy already has a well-established global presence.

Statistics released by the Luxembourg financial regulator, the Commission de Surveillance du Secteur Financier (CSSF), showed that Luxembourg gained 10 authorized investment fund managers in 2017—the most recent official data available—bringing it to a total of 306 entities.

In its annual report published in March, the Luxembourg insurers’ association said that it had welcomed 15 new corporate members, including London’s Hiscox and RSA, growing its total membership to 84 companies. In 2017, U.S. insurer AIG said that it would be setting up a subsidiary in Luxembourg as a direct response to Brexit.

The country has also snagged a major player in the e-payments field: Alipay, the online payments business of China’s Alibaba. Already licensed in London, Alipay received an electronic money license in Luxembourg in January. Though the company didn’t directly cite Brexit as a reason for the move, many analysts at the time noted that it was likely driven by the U.K.’s expected exit from the bloc.

“ManCos” and taxes

What’s lured business to Luxembourg in the Brexit era? The country has its advantages: extensive existing finance infrastructure and tax conditions that are favorable compared to some peers, along with good connections to other transit hubs, a cosmopolitan feel, and English-language schools.

A major draw for asset managers has been the prevalence of Luxembourg’s third-party management companies or “ManCos,” which are regulated special purpose vehicles that enable businesses outside the EU to easily launch Europe-domiciled mirrors of funds managed in other parts of the world.

According to a study by professional services firm PwC, Luxembourg is today home to over 300 ManCos, a number that has increased 4.5% over the last year.

Though the country has historically been plagued with a reputation for being a tax haven, its standard rate today is broadly in line with—or even higher than—many other European hubs. For example, the combined Luxembourg City corporate tax rate is about 25%—lower than France’s roughly 33%, but far higher than Ireland’s standard 12.5% rate. Nonetheless, the Tax Justice Network, a group campaigning for tax transparency, in May published a report putting Luxembourg sixth in a ranking of 64 countries based on the ease of cutting corporate tax bills. Luxembourg’s No. 6 spot doesn’t mean its tax rate is the sixth-lowest in the world, but it does suggest that Luxembourg offers more loopholes than other countries for multinational firms trying to keep their tax bills to a minimum.

‘Bursting at the seams’

As the country looks to establish itself as a post-Brexit hub, it does face come constraints. One is the end of banking secrecy laws that underpinned much of its finance industry in the wake of the LuxLeaks revelations. New laws that went into effect in 2017 have made it easier for authorities to identify illicit cash flows and tax evasion.

Critics have said those changes might dent Luxembourg’s appeal, but government officials argue that tightening regulations and conforming to international standards will only bolster the country’s place in the global financial landscape in the long run.

Nicolas Mackel, head of Luxembourg for Finance, the country’s agency for the development of the industry, argues that the shift has increased Luxembourg’s credibility as a finance center for major companies and made its finance industry more stable.

“As a financial institution looking to relocate, you simply go where it makes sense to go,” says Mackel. “Luxembourg is a real hub for stability and that’s what businesses value.”

Luxembourg City’s size is another barrier to consider. Like other small cities that have experienced rapid growth, it is now facing the prospect of too few schools and home prices that are too high.

Nicki Crush, director at the International School of Luxembourg, says that her school has experienced an overall increase in international applications, including from the U.K. “But at this point ISL has no plans to increase its infrastructure,” she said.

In 2018, the average sale price for a home rocketed 11%, while the cost of renting soared 16% for houses and 10% for apartments, according to property portal

Meanwhile, the population of Luxembourg is expected to exceed one million by around 2061 or 2062, a jump of more than 66% from today’s levels, according to the EU’s statistics agency. Brexit could intensify the situation. Even though many companies have already implemented their relocation plans, some are still waiting for more clarity before casting a decision.

Many residents say drastic action is needed for the country to maintain its competitiveness amid the demographic swelling. One proposal is to release land not originally zoned for housing and to create higher density developments like high-rise buildings.

“Luxembourg is simply bursting at the seams,” said Charles, a local taxi driver who declined to give his last name. “It’s all good and well to be known as a post-Brexit haven. But if we can’t even sort out the basics like traffic and housing then no one will want to live here. That’s just the way it is.”

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Why Business Confidence is Plummeting: the ‘Chaotic’ Environment Makes Planning Problematic

It’s hard to find an optimist these days.

Business confidence, measured by the Business Confidence Index (BCI), decreased some 1.3% in June from the same month last year. And according to the index, June’s 99.82 reading is just below the 100-mark, indicating a pessimistic bent.

Those numbers reflect uncertainty over how trade may affect expenditures and supply chain dynamics. Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, told Fortune in a note that trade concerns are “paramount to souring business confidence,” and could “hasten the downturn” if they escalate.

There are a few main causes for concern.

Growth in the U.S. services sector slowed to three-year lows for July, as business orders reflect the anxiety many are increasingly feeling toward the overall economy. And to make matters worse, slowing manufacturing growth has bled into non-manufacturing sectors as well. According to the Institute for Supply Management’s (ISM) report released Monday, July U.S. non-manufacturing index growth decreased from 55.1 in June to 53.7 (the lowest reading since August 2016), and non-manufacturing business activity also decreased by 5.1% from June readings.

“For an economy that is so heavily dependent on the service sector, this is a particularly troubling release,” Ian Lyngen, head of U.S. interest rates strategy at BMO Capital Markets, wrote in a note.

And Lyngen is right—the services sector comprises 70% of the U.S. economy, and slowed growth signals corporations are concerned about trade and could continue being cautious in the face of China uncertainty. And “while buoyant until recently, further weakness in services sector PMI readings could yet portend further downside risks to the U.S. economy,” Peter Donisanu, investment strategy analyst at Wells Fargo Investment Institute, told Fortune in a note.

The culprit: uncertainty

The “chaotic environment makes planning for businesses problematic,” according to Robert Johnson, professor of finance at Heider College of Business, Creighton University. He told Fortune in a note that’s what leading to lower hiring numbers and less spending. He also suggests that the tariffs “put pressure on corporate earnings and the likelihood of a corporate earnings recession has also increased.”

While employment data is still relatively strong, payroll gains have slowed since last year, and many experts suggest it may be due to questions over trade.

“If you’ve got companies that get concerned about where the future is leading, they’ll get cautious on their hiring plans, and that will lead to a rise in unemployment and consumers will start to pull back,” Dec Mullarkey, head of investment strategy for SLC Management, tells Fortune.

To boot, capital expenditures (or capex), grew only 2% last year and is expected to grow only 3% in 2019, according to the S&P Global Ratings’ Global Corporate Capex Survey. These weaker expenditures are “thin gruel after years of stimulus and means that capex will not offer much help in sustaining the current economic cycle,” writes S&P Global’s Gareth Williams. And SLC’s Mullarkey believes companies aren’t going to spend on capex until there is a clearer path forward with China.

Additionally, Morgan Stanley suggests that, since two-thirds of the goods to be tariffed in the latest levy are consumer goods, the new tariffs could “lead to a more pronounced impact on the US as compared to earlier tranches,” Morgan Stanley chief economist Chetan Ahya said in a note to investors. “Trade tensions have pushed corporate confidence and global growth to multi-year lows.” And according to a recent report, Morgan Stanley suggests economic growth and weak earnings are already being impacted by waning business confidence.

As corporations weigh how to act,’s chief economic analyst Mark Hamrick believes the latest trade escalation “shifts the point of strain … on the shoulders of the consumer,” Hamrick told Fortune.

However, while growth is slowing, it is still considered expansionary (as any reading above 50 indicates). With services sector growth just barely above that 50-level mark at 53.7, the expansion continues…albeit showing signs of strain.

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‘We Will WIN Anyway.’ Trump Calls Federal Reserve Incompetent

President Donald Trump stepped up his relentless assault on the Federal Reserve in a series of Wednesday morning tweets that renewed his demand for “bigger and faster” interest-rate cuts.

“Incompetence is a terrible thing to watch, especially when things could be taken care of sooo easily. We will WIN anyway,” he said. “It would be much easier if the Fed understood, which they don’t, that we are competing against other countries, all of whom want to do well at our expense!”

Donald J. Trump@realDonaldTrump“Three more Central Banks cut rates.” Our problem is not China – We are stronger than ever, money is pouring into the U.S. while China is losing companies by the thousands to other countries, and their currency is under siege – Our problem is a Federal Reserve that is too…..

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Concerns over an escalating trade war between the U.S. and China have shaken financial markets and increased bets the Fed will follow a quarter-point cut it made last week with further easing in coming months. The benchmark S&P 500 index was down 1.6% as of 9:55 a.m. in New York and the 30-year Treasury yield closed in on an all-time low.

Read more: World Economy Edges Closer to a Recession as Trade Fears Spread

“They must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW. Yield curve is at too wide a margin, and no inflation!” Trump said. The Fed last week ceased its gradual shrinking of the balance sheet, which the president calls quantitative tightening.

He also called attention to three central banks that cut rates earlier Wednesday — India, New Zealand and Thailand, though he didn’t name them in the tweet — and said, “Our problem is not China – We are stronger than ever” before returning to his familiar complaint against the U.S. central bank.

Donald J. Trump@realDonaldTrump….proud to admit their mistake of acting too fast and tightening too much (and that I was right!). They must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW. Yield curve is at too wide a margin, and no inflation! Incompetence is a…..

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“Our problem is a Federal Reserve that is too proud to admit their mistake of acting too fast and tightening too much (and that I was right!)”

The Fed lowered rates on July 31 for the first time since 2008 in a move aimed at sustaining the record-long U.S. economic expansion amid uncertainties stemming from the trade dispute and weakening global growth. Those tensions jumped up a notch when Trump announced the next day that he was prepared to widen tariffs against China on Sept. 1, and Beijing retaliated.

Donald J. Trump@realDonaldTrump….terrible thing to watch, especially when things could be taken care of sooo easily. We will WIN anyway, but it would be much easier if the Fed understood, which they don’t, that we are competing against other countries, all of whom want to do well at our expense!

Sent via Twitter for iPhone.

View original tweet.

Chairman Jerome Powell called the cut a “mid-cycle adjustment” rather than the start of a long campaign of easing, though he later clarified that he did not mean to imply that meant only the one move. Investors took the view that deeper Fed easing was needed and U.S. stocks fell.

The Fed, for its part, is pushing back against the notion that the outlook is so grim, pointing to the lowest unemployment in about 50 years. St. Louis Fed chief James Bullard, speaking in Washington on Tuesday, said that “U.S. monetary policy cannot reasonably react to the day-to-day give-and-take of trade negotiations,” and reiterated that, at the moment, he only has one more quarter-point cut for his 2019 forecast.

Trump’s latest attack repeats a series of complaints for this president, who has broken with almost 30 years of White House tradition of staying publicly silent on the central bank out of respect for its independence. The four still-living former Fed chairs issued a joint plea in a Wall Street Journal op-ed this week to maintain the central bank’s independence from short-term political pressures.

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Investors Aren’t Dumping Gun Stocks Following Mass Shootings–They’re Picking Up More

You might assume that following a mass shooting—such as the two over the weekend that killed 31 and injured dozens more in El Paso, Texas, and Dayton, Ohio—that investors would dump gun stocks.

You’d be wrong.

Shares of gunmakers Vista Outdoors and American Outdoor Brands jumped 2% Monday, while shares of Sturm, Ruger & Co rose as much as 4% before forfeiting its gains, closing the day down 2% Monday.

The twisted logic goes something like this. Investors tend to pile into gunmakers following mass shootings, betting that enthusiasts—fearful of greater regulation—may stockpile arms. Indeed, on the trading day following the shooting in Orlando in June of 2016, American Outdoor’s stock rose 7% and Sturm, Ruger & Co was up 9%.

One outlier? After the Sandy Hook massacre in 2012, American Outdoor fell 5% and Sturm and Rugur fell 3%.

Somewhat counterintuitively, the presidency of Donald Trump, who has blamed the shootings on video game violence and mental health issues, and stood in opposition to gun control, has marked a tough stretch for three publicly traded gun companies. While the S&P 500 has risen 40% since Trump’s election, shares of Vista are down 81%, American Outdoor Brands has lost 69%, while Sturm, Ruger & Co has dropped 25%.

Gun sales hit a record in 2016, when it was widely believed that Democratic presidential candidate Hilary Clinton would win the election—and focus on gun control. But once Trump took the mantle and the fear of gun control subsided, sales slumped.

Last year, one of the states friendliest toward gun owners, Florida, passed a bill to limit ownership to those over 21, compared to the previously stated 18. The law had been a reaction to the 2018 shootings at Marjory Stoneman Douglas high school in Parkland that ended with 17 dead, as well as the 2016 shootings at an gay Orlando nightclub that resulted in 50 deaths.

The most recent shooting in the El Paso Walmart has also put pressure on the private sector, with consumers petitioning the retailer to stop selling guns in stores.

One thing is certain: As long as there are people to stockpile guns and investors to buy stock in the companies that supply them, “the next one” feels like a dark inevitability in this America.

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